IRS appears ready for most fiscal cliff changes to tax law

By Charles S. Clark

January 4, 2013

Like all agencies, the Internal Revenue Service must live with uncertainty in the next two months as Congress and the White House resume their fiscal sparring over sequestration, raising the debt ceiling and the March 27 expiration of the continuing budget resolution.

But IRS managers tasked with programming computers for the approaching filing season were doubtless pleased with much of the American Taxpayer Relief Act that President Obama signed on Tuesday. The new law makes permanent the most recent version of the ever-shifting “patch” to the 42-year-old alternative minimum tax designed to prevent taxpayers from using deductions and exemptions to completely erase their taxes owed. Without such permanence, acting Commissioner Steven T. Miller had warned Congress, the agency might be late in updating software and delay refunds to millions of taxpayers.

On Thursday, IRS issued a notice with new income withholding tables for use by employers in 2013, superseding the tables just issued on Dec. 31. Accompanying guidance instructed employers to adjust Social Security tax withholdings to reflect the expiration of the two-year-old payroll tax holiday intended as an economic stimulus. It recommended that all taxpayers check their pay stubs and reconsider revising their W-4 withholding amounts to reflect the lowered paycheck.

Though IRS leaders for the past two years have protested budget cuts that they argue will impede agency responsiveness to taxpayers, the new certainty around the AMT patch—which had expired a year ago— is seen by outside specialists as a welcome break. Making the AMT patch permanent “bodes well for the future for the agency” and will allow it to get a grip on that piece for the filing season,” Jeffrey Trinca, a longtime Senate tax counsel now a vice president of Van Scoyoc Associates, told Government Executive . “They’ve got to be popping corks over there because it affects so many taxpayers.”

The new law tinkers with other so-called tax extenders, Trinca noted. The changes affect the alternative fuel credits, such as those for wind, and they extend for five years the enhanced earned income tax credit and the enhanced child tax credit, while making permanent the expanded adoption credit and the exclusion for employer provided education expenses.

If IRS gets a late start in absorbing such changes, Trinca said, “the handshake agreement that is made when the tax return is submitted” could be disrupted --through no fault of the taxpayer -- because imperfect software rejects it. “It’s a big worry when the agency is processing 10 million to 12 million returns a day,” he said. “Sophisticated taxpayers simply go back to their tax attorneys who phone in, listen to music for 30 minutes and get it fixed. But others will have longer wait times.”

Robert Kerr, senior director of government relations at the National Association of Enrolled Agents, said “the fact that the AMT patch is permanent is a net plus for tax administrators because they don’t have that recurring dilemma on how to program computer systems.” But whether the new law as a whole “clears the decks for the coming tax season” is unclear, he added.

Kerr conjectured that the agency may not have programmed for the other tax extenders that were altered, but that planners could proceed now that further tax changes are not on the horizon.

But IRS won no special clarity on the fate of its own budget, which would be affected if across-the-board budget cuts are forced in March and if Republicans who have been trimming its appropriations do so again in whatever budget deal succeeds the current continuing resolution in March.

When Trinca approaches the agency on behalf of a client on a “mundane issue of tax administration, he said, IRS employees say, “We don’t want to talk about it --we have no clue about our budget.” Operating under a continuing resolution “is a nightmare because you can’t enter into contracts, and if you’ve done stage one, you can’t move to stage two.”

Such a freeze in the action, from a conservative perspective, “might seem good as a way to cut back on an agency,” Trinca said, “but in some sense it’s a conservative nightmare because the government employees are getting paid to sit around and can’t do their jobs.”

Kerr added that it’s hard for the agency to make changes halfway through the fiscal year, and the IRS—whose budget is heavily weighted toward personnel rather than programs--is not likely to see a budget windfall in March.